Customer Churn - Mastering A Key SaaS Metric (9 min read)

For SaaS businesses, customer churn is often a key metric on which the success of the business is measured. In fact, customer success as a department and a job role was born out of the need for SaaS companies to monitor and mitigate churn.

But as the reaches and impact of customer success evolve, it has the ability to not only regulate churn, but to be proactive against it when focused on user adoption, as well as retention, expansion, and advocacy. Instead of developing strategies that only react to churn, we see it as imperative to prevent churn in the first place with strategies and processes that build stronger foundations for users and set the stage for continued success.

Every department influences churn or is influenced by it in one way or another. Product managers, for instance, develop new products and iterations, so their work has a direct impact on the customer experience and whether or not users are successful in adopting; not to mention that adoption tactics can often be baked into the product itself. Sales and marketing professionals also have stake in churn, particularly as the onboarding and adoption phases are happening earlier in the sales cycle rather than the customer journey as freemiums and trials become more common.

Businesses that manage to better understand and get underneath the causes of customer churn will find themselves in an excellent position to outsmart their competitors and grow customers who find exponential value with their product and become advocates.

In this guide, we take a deep dive into the topic of customer churn to share everything you need to know from causes to strategies to tools.

1. What is Customer Churn?
2. Demystifying the Causes of Customer Churn
3. Predicting Customer Churn
4. 8 Strategies for Reducing Customer Churn
5. 12 Powerful Best Practices for Churn Prevention
6. Top Tools to Reduce Customer Churn
7. Calculate Your Churn

1. What is Customer Churn?

Churn represents the number of customers who have unsubscribed from your product or service in a given time period.

Churn is not a one-off event. In the words of Customer Success Consultant Lincoln Murphy, "the seeds of churn are planted early.” There are three stages that are commonly used to classify churn, indicating at which point in the customer journey it occurs. Let’s look at these three stages as well as a few useful questions to consider as you work through each stage.

Three stages of customer churn

Stage 1: Short-term churn

Short-term churn happens when your users feel that your application is not a match for them. They have tested your core value but didn’t reach the WOW! moment they hoped for that would have provided them with good reasons to stay subscribed. This type of churn is highly influenced by the onboarding and adoption phase of the customer journey.

Stage 2: Mid-term churn

Mid-term churn takes place when users have already worked with your product for a while, but didn’t successfully adopt or integrate the system into their day-to-day processes. They likely have encountered some issues along the way — e.g., unresolved tickets, lack of needed features — but are not seeing enough business value to justify the issues they are experiencing.

Stage 3: Long-term churn

Long-term churn is a bit different because it isn’t just about considering users who are leaving. Instead, it looks at the chances you’ve missed to upsell and cross-sell to your userbase and realize negative churn — i.e., offsetting customer attrition with revenues from existing accounts.

However, we prefer to steer clear of classifications like this that lead us down a rabbit hole. Getting this granular about when your customers churn is reactive at best and won’t help your team take strides to fight against churn before it happens at all.

Instead, we ascribe to Lincoln Murphy’s concept of unavoidable churn vs. avoidable churn. Let’s break down what that means:

Unavoidable churn: Unavoidable churn, according to Murphy, is the rarity, but companies often fall into the trap of blindly accepting any churn as unavoidable. “You have to challenge that notion every time it surfaces,” he notes. This requires being honest with yourself about why the churn happened, avoiding placing blame on one person or department, and developing a plan to eliminate the problem going forward.

Avoidable churn: Avoidable churn happens because we have gaps in our processes and/or we’re not taking customer feedback seriously. In fact, most churn is avoidable. But it’s critical to evaluate these processes early and often and to ensure there are touchpoints that open the lines of communication between your users and your organization.

Why is customer churn important to measure?

As the adage goes, you can’t improve what you don’t measure, and you surely want to be in the know about your churn rate since even a small change can have a drastic impact on revenue — up to a 95% jump for a 5% increase in customer retention. You should, therefore, conduct a thorough churn analysis to assess how both your product experience and business relationships are being received by your customers.

What’s more, churn metrics can provide you with a sense of direction, facilitating alignment across your teams and provide answers to questions about gaps in your buyer to customer journey.

How do you calculate customer churn?

There is not only one way to calculate churn. You can learn far more when looking at it from several vantage points and use different formulas to grasp the details as well as make sense of the bigger picture. We recommend taking a look at each of the following three metrics to start:

• Customer churn rate: The percent of users canceling or downgrading their subscription
• Revenue churn rate: The percent of revenue lost from customers who have left
• Net MRR churn: The rate at which you are losing MRR (monthly recurring revenue) through downgrades and cancellations, offset by the impact of expansions and reactivations.

The distinction between the number of users canceling their subscription (customer churn) and the corresponding revenue lost (revenue churn) matters because some customers are more monetarily “valuable” to you than others. Certainly your goal is not to lose any of your customers, but if the customers you are losing are, for instance, bad-fit or low-revenue customers, the way you go about fixing the issue of churn is different than if you were losing multiple strategic, high-value customers.

What is an acceptable SaaS churn rate?

A 5% monthly customer churn rate doesn’t seem that bad, right? Well, if you add that up over a year, it actually means that nearly half (46%) of your userbase will be gone 12 months from now. Even 3% monthly churn converts to a 31% total by year-end — giving you an indication of just how hard your sales and customer success teams need to work only to keep the size of your user base constant. (This is frequently referred to as a “leaky bucket.”)

For that reason, Lincoln Murphy recommends that SaaS businesses shoot for a 5-7% annual churn rate. That’s the equivalent of 0.42 – 0.58% monthly. Bear in mind that this number is likely to vary across industries, customer types, verticals, etc. Netflix, for instance, has an annual customer churn rate of 9% which sounds high, but is pretty good when its primary competitors struggle to keep theirs below 20%.

Why is being able to predict churn essential?

If you can predict customer churn according to different scenarios, you are more adequately positioned to make better, more proactive business and product decisions. Should you prioritize the deployment of new high-tech touchpoints? Or should your staff spend more time with customers in high-touch scenarios? Linking these options to how they influence customer retention, revenue growth, and company valuation can be very helpful in making the right call and proactively reducing churn.

2. Top Causes of Customer Churn

Customers stop using your product for a variety of reasons, and customer success and product teams in particular are in a better position to prevent churn when they know what these reasons are and can set themselves up to be proactive against them.

9 avoidable reasons for customer churn

1. Inability to successfully adopt

User adoption is the bedrock for any great customer success strategy. It sets the foundation for your users’ understanding of your product, their business relationship with your organization, and is critical to getting them through the retention, expansion, and advocacy stages. Developing a strong user adoption strategy sounds like a no-brainer, but many companies skip this step and try to move straight to retention, often paying the price for doing so with higher churn rates, fewer revenue expansion opportunities, and users who aren’t confident in being an advocate for your company.

2. Starting off on the wrong foot

Too often prospective users who were excited about a product end up disappointed and leaving because of a suboptimal onboarding experience or no onboarding at all. Customers always strongly benefit from initial guidance (whether through high-tech or high-touch onboarding models) to get started more effectively as it shows the user you care about making sure they find value with your product, helps orient them toward a new process in their day-to-day job, and gives you the opportunity to begin building a strong business relationship to ensure continued success.

3. Lack of support

Users are likely to churn when there is no person or system in place to provide them with prompt support to overcome the initial obstacles they face when getting up and running. So if you take too long to come back with answers to their questions, they may just get discouraged and prefer to quit instead of endlessly waiting for someone to follow up on their issue.

4. Not the right target customers

Even if you get everything else right, it could be that your sales and marketing teams are targeting customers that aren’t a good fit, either from an Ideal Customer Profile (ICP) perspective, value perspective, or selling on incorrect points. These bad-fit customers may actually be misleading you and consuming a lot of your time and resources, while it would be much easier and more profitable to focus on retaining good-fit customers.

5. Failed product iteration

Your customer success and product teams may fail to gather and integrate the data and feedback users generate either within your application, with your support team, through outside reviews, or elsewhere. The consequence is that without the right information, your product strays from customer needs and increases the likelihood of customer churn.

6. Lack of user engagement

If your product isn’t a vital part of your users’ lives or if they aren’t seeing the value of it on their own, they may become disengaged and churn. It’s up to your team to ensure you develop initiatives that re-engage customers (email campaigns are great for this) and help them find the value they may be missing.

7. Not keeping an pulse on competitors

Your staff can get so focused on what’s happening inside your own product that they stop considering what other alternatives buyers have on the market. This can cause users to churn because your competitors fill a new market need that you may not even be aware of.

8. No logical upgrades

Users may get so happy with a SaaS application provider that they just wish there were more products or features available to tackle their emergent needs. Unfortunately, if they have no choice but to look elsewhere to fill the gap, then you’ve got a missed opportunity for expansion. Aggregate user feedback and always be thinking about how you can take the next step in filling your users’ needs.

9. Not achieving Desired Outcomes

Customers churn when they’ve been with you awhile but still haven’t filled the need for which they purchased you. That’s why establishing these desired outcomes early and ensuring success in hitting them is critical to a lasting relationship.

Unavoidable reasons for customer churn

1. Customer goes out of business

If your customer goes out of business, there isn’t much you can do about that churn. However, do consider how you can create multiple champions within an organization who will take their success with your product into the next company they work in.

2. Customer gets acquired

If your customer is acquired, again, there isn’t much you can do, but try considering this an expansion opportunity rather than a reason for churn. If your product made your users successful in their role and that success is a reason they were acquired, this gives you an opportunity to sell up into the new parent company or other subsidiaries.

3. Sponsor change

Your champion or power user leaving your customer’s organization isn’t typically something you can prevent, but being proactive about having multiple champions will help you tremendously when/if this time does come. If your only champion leaves, a void is created that leaves plenty of room for other team members to evaluate new tools and establish new processes that could cause the customer to end their relationship with you.

3. Predicting Customer Churn

It is crucial to anticipate how different courses of action may affect customer churn. That is why customer success and product managers are increasingly looking for ways to predict customer churn and work to be proactive against it.

Top 5 metrics for predicting churn

While predicting customer churn with accuracy is tough, we have handpicked the metrics which we believe are the most useful for the job, namely indicators like:

• Login Activity: Based on the frequency of logins which helps to identify underperforming accounts and determine whether targeted engagement campaigns are needed to boost login frequency.
• Feature Adoption: Based on the number of unique features that each user within an account is using within the product. This lets product managers and customer success teams know if intervention is necessary to help users to discover core features or adopt new ones and can allow product or customer marketers understand key features to promote.
• Sentiment: Tracked through Net Promoter Score (NPS) surveys and helps you gain an understanding of how successful your users feel using your product.
• Technical Support: Calculated by the number of support tickets that are fulfilled and closed by an account or user. Support needs and requests can have a big impact on customer health, particularly due to severity and time to response.
• Financial Health: Measured by a customer’s monthly subscription rate, whether payments are made on time or delayed, and the validity of the account’s credit card. This indicator is often not equally weighted to the others, but knowing that a customer’s credit card is going to expire or that their account is up for renewal lets you be proactive in outreach that could prevent unnecessary churn.

Building a customer churn prediction model in 4 easy steps

Building a prediction model for churn is one of the most well-known applications for machine learning in data science, but ultimately it involves the same processes you need to train your team on predicting churn and being proactive against it.

Using the same metrics you’re already monitoring as a basis, it becomes possible to forecast which customers are at risk of churn within a specified period. We have defined a 4-step process which SaaS businesses can use as a starting point to build a customer churn prediction model tailored to their needs.

Step 1 — Start collecting and integrating data

It all starts by collecting relevant and actionable data on users and their behaviors. You’re probably doing that already, but the challenge you might face is a lack of data integration, especially if your departments have been using different tools, databases, and spreadsheets to manage customer and product usage data. In our 2017 Customer Success + Product Management Alignment Benchmarking Report, we found that more than 80% of these two teams at B2B SaaS companies work in separate applications or spreadsheets, leading to disparate data. The issue is that without aggregated and complete data sets, it becomes virtually impossible to predict churn and causes rifts between the teams that work to be proactive against it. There is too much guesswork involved and rarely a shared understanding of why users cancel their subscription.

Step 2 — Find out what value means to your users

What are the instances of churn harming you the most? Are there are specific segments more likely to move smoothly throughout the customer success journey? Who are your best customers and what makes them stick around? How long are users expecting to wait for your support team to come back to them? Finding answers to these questions can help you identify retention thresholds as well as good practices to reduce time-to-value for your users.

Step 3 — Define retention thresholds

Once you know what makes users tick, you can define retention thresholds warning you when actions are required to influence and prevent churn. For example, Hubspot found that customers reading their blog were less likely to cancel their account. Using this insight, customer success managers may start connecting blog visits to the likelihood of churn — potentially reducing that probability by re-engaging readers with relevant content when they are not active with the product. Other thresholds you may find important include:

• Login frequency: users logging in less than “X” times per week
• Onboarding: users taking more than “X” days to complete a milestone
• Trial period: less than “X” days left before the end
• Ticket resolution: customer support not resolving a ticket after “X” hours

Step 4 — Data visualization and interpretation

The next step is to present data in a visually compelling and actionable way that gives your team the knowledge they need at a glance to be proactive against churn. To get a better sense of what that means in practice, take a look at UserIQ’s customer health view. In the example below, health is shown to be trending upward, calculated by various metrics — key feature usage, login activity, number of users, sentiment, technical support and financial.

This view, when combined with both data drill down and segmentation options, gives CS teams a dynamic understanding of the health and success of an account at any given time and offers a launching point for being proactive against potential issues.

4. 8 Strategies for Reducing Customer Churn

With a good understanding of the common reasons beneath churn and a model to predict it, you now need to prioritize your efforts by selecting and executing one or more churn prevention strategies, in addition to following best practices to retain customers and enable sustainable growth for your SaaS business. This section looks at these aspects in detail at various points in time.

Short-term customer churn prevention

1. High-tech onboarding

As we discussed thoroughly in our Customer Onboarding Guide, first impressions have a lasting impact on users. You can rely on a high-tech onboarding churn strategy if your application is fairly straightforward to learn. Tools at your disposal include guided tours, automated email campaigns, as well as onboarding-specific content like how-to guides and recorded webinars.

2. High-touch onboarding

Some enterprise accounts may still prefer to interact with your customer success team directly, and this might present an opportunity for your SaaS business to offer premium plans with a strong personal touch to drive retention. You may organize face-to-face meetings or frequent calls with strategic users who can then fast-track their learning.

3. High-tech/high-touch blended onboarding

One of the most effective onboarding models is one that blends both technology and people. The technology sets a baseline and ensures customers with a self-serve mindset are able to get started on their own while a customer success or onboarding rep can focus on relationship and business goals.

Want to find out how scalable your current customer onboarding program is? Check out this simple grader to get a score across 3 core areas of onboarding success.

Mid-term customer churn prevention

4. Develop a VOC program

This strategy consists of actively involving users in the product iteration process by establishing a voice-of-the-customer program with, for example, NPS surveys to gather frequent feedback and hosted communities where new ideas are discussed. For SaaS businesses, collecting and effectively responding to customer feedback is critical to success.

5. Invest in your champion

Your champion is often your window into your customer company and your strongest ally. If they’ve put their reputation behind bringing your product into their organization, its important to nurture that relationship and show that you appreciate them. This should mean that your champion is the most trained user on your customer’s team and that they have the resources they need to be effective in reaching their goals using your product.

6. Review goals frequently

The reason your customer purchased your product is to serve a business goal, but those goals do change over time and your product must be able to grow with your customers. Be sure to discuss customer goals frequently; not just in QBRs (quarterly business reviews) but in day-to-day conversations. It’s part of relationship building and is the key to ensuring your product can grow with your users needs.

Long-term customer churn prevention

7. Product extension

Your users are always growing and moving on to the next challenge. Your product needs to keep up! Long-term churn happens when you lose touch with that important “what’s next” conversation with your customers and they outgrow your capabilities. It requires a close relationship with customers to thoroughly understand them and their behaviors both inside and outside your application.

8. Customer extension

You may boost retention by targeting and becoming more appealing to users who are currently outside of your best-fit segments. For instance, you can leverage dormant accounts or incite new buyer categories to subscribe. This strategy makes sense if you feel that the initial market for your application is becoming saturated, but it means you probably need to rethink some aspects of your application and find other ways to deliver value.

5. 12 Powerful Best Practices for Churn Prevention

No matter the churn strategy or set of them that you decide to follow, there are tips and best practices on how to reduce customer churn applicable across contexts. Here are the ones which we think are the most relevant based on our experience working with SaaS companies.

1. Avoid overselling

Overselling can help organizations to close deals, but that doesn’t work with subscription-based business models since users are free to leave anytime they want in a few clicks if they feel they aren’t seeing the value they expected. It is essential that you manage expectations carefully by getting your sales, marketing, product, and customer success teams aligned. Users will feel betrayed and are likely to quit immediately if you do not (at the very least) meet the expectations you create.

2. Show the value quickly

Especially in the case of B2B SaaS applications, your users are busy professionals who want to see business results. That means you need to get them up to speed quickly or they may come to regret their decision, assuming the tool and your partnership is not working for their business and won’t help them achieve the results they’re looking for.

3. Specify relevant use cases

Perhaps you’ve noticed that some customers aren’t using your product in the way you intend them to, and they may not perceive the entire value at their fingertips. What you can do is to show them how other accounts in their category have successfully leveraged your application’s functionality and highlight a combination of features which you know work well together.

4. Bring users back to your application

It can be that users who are not engaging with your product got distracted by something else and they never took the time to come back. So a good practice is to invite them to try your product again, perhaps with the help of a customer success consultant and a trigger-based engagement campaign — for example, an email sent only to new users who haven’t logged in recently or haven’t completed their onboarding.

5. Choose pricing tiers wisely

Your application may deliver a lot of value, but some customers still churn because there isn’t a plan that works well for them and justifies the cost. Maybe all the features they need are already available in your free tier or some of your subscriptions are expensive compared to competitors offering similar functionality or even for the types of companies you’re attracting.

6. Build customer journey maps

Bearing in mind everything that matters in the short-, mid-, and long-term regarding churn, you can build maps that detail how users are expected to move throughout the customer success journey. Doing so can help you anticipate the reasons why users might downgrade or cancel their subscriptions, which actions are likely to help prevent that, and give you a backup plan to be proactive before it’s too late.

7. Use satisfaction surveys and feedback tools sparingly

While gathering feedback should be an essential part of your customer churn prevention efforts, it should not interfere with user experience. So think it through before deploying customer satisfaction surveys and other tools, and make sure that it’s convenient for users to share their ideas. Also, give them the option to skip questions or not participate.

8. Act on the info you collect

Gathering data and feedback takes time and resources, so you should ensure that what you’re measuring is useful and can provide insights into customer churn. For instance, it should help you identify customers that are at risk of leaving soon as well as sharing intel about what is making other users successful so you can take relevant actions to improve retention in real-time.

9. Use dashboards

You always need to keep an eye on how users are performing with your application at a high level, and dashboards can be a great tool to inform you of any generalized risk of churn. If you also get great drill downs from your dashboards, you can use them to detect bugs as well as an abnormal increase in customer complaints.

10. Drill down to make sense of churn

Be careful examining only broad sets of data. We recommend segmenting user data along different characteristics to develop a clearer picture of what’s happening. These segments might be at the account or user level. At UserIQ, we segment with a milestone-based strategy. Here are a few segments we like to look at:

• The “Hello!” segment

This category of users recently signed up and are logging in for the first few times. They likely know very little about your product and need some guidance to start off on the right foot. When you have a segment created of your newest users, you can deliver welcome messages or tours, track their onboarding process and ensure that they are successfully adopting features.

• The “Time’s up” segment

This segment consists of prospective buyers reaching the end of their trial period or existing customers whose contract is coming up for renewal. To ensure a smooth transition to a paid plan or the next billing period, you can proactively target this segment with a reminder or special offer.

• The “Just got paid” segment

You may not always perceive it that way, but users who decided to upgrade or stay subscribed can go through a stressful time as they’ve just put their reputation and their money on the line for your product or service. You can reassure them that they made the right decision by helping them hit a WOW moment, like sending “thank you” swag or delivering a “high five” engagement.

• The “You did WHAT?!” segment

These are the users who just hit a WOW moment doing something significant that will help them make the most of your application — like combining your most valuable features.

• The “No, you didn’t…!” segment

The fact that some customers did not do something during a given period can be equally revealing, indicating that they might find it challenging to adopt your product and need a little push.

11. Know why users are leaving

It’s tough to lose a customer, but learning through the process is critical so you can avoid the same mistakes with in the future. Make sure you understand why users are leaving and have a plan in place to address. It could be that they belong to bad-fit segments which take a lot of time to satisfy and do not benefit much from your application, or it could be something bigger that’s avoidable in the future. Whenever possible, conduct post-mortems with your team and exit interviews with customers to find out where you may have missed the mark and how you can improve for other customers in the future.

12. Make churn prevention everyone’s responsibility

Customer success managers own the customer journey, but their ability to prevent churn is closely linked to the work of others. For instance, sales and marketing should target the right customers and product teams must plan their roadmap around actual user needs.

6. Tools to Reduce Customer Churn

After looking at causes, models, strategies, and best practices, one fundamental question remains: How to reduce customer churn with the right tech stack. We have built a comprehensive list of the tools and solutions available in the market and categorized them so you can easily identify what is the most relevant to your SaaS application. Note that some providers may appear in more than one category.

User analytics and testing

Those customer success tools and solutions are valuable to take informed actions to reduce churn. The functionality offered include heatmaps, dashboards, A/B testing, segmentation, and predictive analytics.

Support and user engagement

If you feel like your users need more guidance to learn about your product, this category of software can help you create and deploy engagement points and facilitate communication with your support team.

Gathering customer feedback

These applications are valuable if you want to get the conversation started with your users and collect their opinions about your product in general as well as specific aspects through surveys.

Financials and billing

Your tech stack would be incomplete without a way to connect your application to financial performance. Here is the list of tools and solutions you can use to monitor and facilitate payments and evaluate your plans.

In Conclusion

If you want to reduce customer churn, you have to get underneath the causes and understand how to implement best practices and strategies for being proactive against it. This means gathering (and using) customer feedback, aligning teams across the organization toward the voice of the customer, and building comprehensive journey maps that help you see the big picture. Churn is often seen as a lagging indicator, but measuring it and learning to be proactive against in the future is critical to the success of your users and your business.

For our complete guide on customer churn, click here.